As you can see, M2 has been growing at a reasonably steady rate for the past 15 years. BASE made up a reasonably constant proportion of M2 up until the end of 2008. At that point the Fed had to dramatically increase the BASE money supply in order to keep M2 expanding at roughly the accustomed rate. There are a number of different ways of looking at this. It could be that this is simply the new normal and the the Fed's balance sheet will henceforth make up a higher percentage of the overall money supply than has generally been the case. Alternatively, you could view the situation as essentially benign. The Fed's balance sheet is relatively large because it had to respond to the crisis. It will shrink over time as the economy recovers. My guess is that this is Chairman Bernanke's preferred assessment. The pessimists among us tend to believe that quantitative easings are a bit like wars in the Middle East. Much easier to get into than out of. I'm inclined towards pessimism. There are very few free lunches in economics. The Fed's extraordinary actions over the past few years may well have taken some of the bite out of the crisis, but my guess is that we pay for them through either inflation or uncomfortably tight monetary policy down the road. Monday, April 25, 2011
Looking at the Money Supply
The following chart shows the growth in the broad money supply (M2) and BASE money supply as a percentage of M2 over the past 15 years. BASE money supply is physical currency plus Federal Reserve accounts. This is the portion of the overall money supply that the Fed directly controls. 
As you can see, M2 has been growing at a reasonably steady rate for the past 15 years. BASE made up a reasonably constant proportion of M2 up until the end of 2008. At that point the Fed had to dramatically increase the BASE money supply in order to keep M2 expanding at roughly the accustomed rate. There are a number of different ways of looking at this. It could be that this is simply the new normal and the the Fed's balance sheet will henceforth make up a higher percentage of the overall money supply than has generally been the case. Alternatively, you could view the situation as essentially benign. The Fed's balance sheet is relatively large because it had to respond to the crisis. It will shrink over time as the economy recovers. My guess is that this is Chairman Bernanke's preferred assessment. The pessimists among us tend to believe that quantitative easings are a bit like wars in the Middle East. Much easier to get into than out of. I'm inclined towards pessimism. There are very few free lunches in economics. The Fed's extraordinary actions over the past few years may well have taken some of the bite out of the crisis, but my guess is that we pay for them through either inflation or uncomfortably tight monetary policy down the road.
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As you can see, M2 has been growing at a reasonably steady rate for the past 15 years. BASE made up a reasonably constant proportion of M2 up until the end of 2008. At that point the Fed had to dramatically increase the BASE money supply in order to keep M2 expanding at roughly the accustomed rate. There are a number of different ways of looking at this. It could be that this is simply the new normal and the the Fed's balance sheet will henceforth make up a higher percentage of the overall money supply than has generally been the case. Alternatively, you could view the situation as essentially benign. The Fed's balance sheet is relatively large because it had to respond to the crisis. It will shrink over time as the economy recovers. My guess is that this is Chairman Bernanke's preferred assessment. The pessimists among us tend to believe that quantitative easings are a bit like wars in the Middle East. Much easier to get into than out of. I'm inclined towards pessimism. There are very few free lunches in economics. The Fed's extraordinary actions over the past few years may well have taken some of the bite out of the crisis, but my guess is that we pay for them through either inflation or uncomfortably tight monetary policy down the road. 
Sunday, April 10, 2011
Unfortunately Serious
James Fallows of the Atlantic has given seven reasons that Paul Ryan's budget proposal is neither brave nor serious. I'll grant that 6 out of 7 are pretty solid. The exception is:
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3) A plan that exempts from future Medicare cuts anyone born before 1957 -- about a quarter of the population, which includes me -- is neither brave nor serious. See "canny or cynical: take your pick" above.This may not be brave, but is definitely serious. Old people are numerous and prone to voting. They also have a choice. If you are in your mid-fifties or older today there is a reasonable chance that you will be dead before the country's fiscal situation implodes. It therefore makes sense to veto any proposal that reduces benefits. There are plenty of voters under the age of 54, but they are in a very different situation. Barring untimely demise, these Americans will live to see the nations fiscal Waterloo. They therefore have an incentive to accept painful reforms in order to avert the otherwise inevitable disaster. The political reality is that no reform that adversely impacts current AARP members has any chance of adoption. It is neither brave nor serious to ignore that fact.
Sunday, January 16, 2011
Right Price?
I'm not sure exactly how they do it, but Goldman Sachs has an incredible ability to receive credit for being smarter than they probably are. Consider this from the Wall Street Journal's Opinion page (gated):
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In fact, the firm's real talent isn't knowing what the price will be, but what the price is. And Goldman clearly hit the mark with the $50 billion valuation implied by its $450 million investment in Facebook last week. The firm also rigged up a deal to make $1.5 billion in Facebook shares indirectly available to its well-heeled clients, and every sign is that the offer was oversubscribed.If the offer was oversubscribed then Goldman clearly did not "hit the mark". Having more willing buyers than shares to sell means the price was set to low and Goldman left money on the table - to the detriment of their clients, the existing shareholders of Facebook.
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